The Politics of IMF Lending

The Politics of IMF Lending

April 01, 1984
Originally published in Cato Journal

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I. Introduction

The 1983 debate over increasing the funding of the International Monetary Fund (IMF) reflects the basic conflict between the above two views. One school, as exemplified by the first quote, sees the market as a fragile institution requiring the guidance of an impartial and objective government referee to enforce order and stability. The alternative view sees the market as both more robust and far more able to correct world financial problems than a political institution. The former views government as a positive force for good in an otherwise self-centered universe; the latter sees government as merely another forum in which self4nterest operates, but one that lacks many of the corrective feedback mechanisms of the marketplace. To the former, government is the solution; to the latter, it is the problem.

The theme of this paper is that a significant change is occurring in the way foreign economic assistance programs are viewed. This change is overdue and parallels a similar reassessment of domestic economic policies. These trends are likely to strengthen the arguments and political effectiveness of the array of forces that came to oppose the IMF in 1983.’ Those favoring increased government-to-government assistance face an increasingly difficult, and I would argue ultimately hopeless,task. As Tom Bethel (1983) has noted: “[T]he IMF is doomed . . . because it has either failed to grasp, or it dare not acknowledge, that capitalism and socialism are not equally effective methods of economic growth.” The following sections develop this theme.

Section II provides a brief history of the IMF’s financial-management role from its creation at the Bretton Woods conference in 1944 to today. Section III addresses the question of whether the IMF as a political institution is the most effective means of managing the world financial system. The fourth section addresses the advisability of obtaining credit-assessment advice from private firms such as Moody’s and Standard & Poor’s rather than the JMF. The fifth and central section of the paper addresses the specific arguments raised in the recent legislative debate over whether the United States should increase its quota to the IMF. Section VI provides an overview of the various means used by the opponents of the IMF funding increase to influence the policy debate. Section VII offers some concluding remarks.

Fred Smith - The Politics of IMF Lending